Children’s savings accounts

Saving for your child’s future is becoming ever more important as the expense of living and education continues to rise. Instead of giving them that extra toy or money to buy sweets, it might be worth thinking about opening a savings account. Grandparents and other relatives may be keen to help with regular savings contributions too so it’s good to have a place to keep it all and hopefully watch it grow.

Ask a young child if they’d like to put the £5 in the bank or buy some sweets, and the answer is likely to be a foregone conclusion! However, explaining how banks and savings work to children is an essential life lesson, and one that’s better learnt early.

By involving children in their savings account – maybe showing them the balance online or taking them into a branch to pay cash in, they’re likely to enjoy seeing the account grow as their interest accrues. It’s even possible that your little spender becomes a little saver as they see their balance increasing!

A quick word on tax

Unfortunately, it’s a myth that children don't pay tax, they’re actually taxed in exactly the same way as adults.

However, as most children aren’t employed and earning income, they can earn up to £17,000 from savings without paying tax on it in a financial year. If the child is older and does have income, and even if they earn enough to be a tax payer, the personal savings allowance which launched on 6 April 2016 means that basic rate taxpayers can earn an additional £1,000 of savings interest tax-free.

There’s also a Junior ISA to consider, a long-term, tax-free savings accounts for children. Children can save up to £4,080 a year, as per the 2016-7 tax year limits. There are two types of Junior ISA – a cash version where you won’t pay any tax on interest earned on your savings and a stocks and shares version where you won’t pay tax on any capital growth or dividends you receive when your cash is invested.

Junior ISAs might sound similar to a normal savings account if a child doesn’t pay interest but don’t forget this lump sum and the amount of interest it earns can grow over time. It is also automatically transferred into an adult ISA at 18 ensuring savings are protected within the tax free wrapper.

You can’t have one of these if you have a Child Trust Fund, however if you would prefer to have a Junior ISA, you can ask for the Child Trust Fund to be transferred into it as the scheme is now closed.

There is though, a bit of a catch when it comes to children and tax.

If the child’s balance has been given to them by a parent or step-parent, and the interest is over £100 a year, the whole balance is taxed as though it were the parent’s cash, and taxed at the parent’s rate. If the parent is within their personal savings allowance and the child's savings don't take them over, then it'd still be tax free.

If this sounds a bit unfair, the aim of the rule is to stop parents using their kids' tax-free allowance as an extra allowance for themselves.

How do children’s accounts work?

Children’s accounts work pretty much as adult accounts do. Deposits and withdrawals can be made in the same way.

If the child does need to actively use the account, you’ll need to note that some accounts will penalise you (by reducing the interest paid) if withdrawals are made. Another key difference is that children’s accounts don’t offer overdrafts, so your children can’t borrow money.

Savings accounts can normally be opened by children from the age of 7, while current accounts are usually only available to children aged from 11 to 18.

If they’re below 16, you’ll usually need to handle the accounts administration on their behalf.

Some examples of some interest earning children’s savings accounts

Most financial institutions will offer children’s accounts. While they’re similar in many aspects there are often differences. Some will allow withdrawals as the child gets older and may even offer debit cards from certain ages. Such accounts are likely to pay less interest so it’s a matter of what are the most important priorities for your children – it could pay to shop around.

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